SOUTH KOREA Law and Practice Contributed by: Ie Hwan Yoo, Hang Jin Chang and Da Eun Jung, Kim & Chang
8.2 Withholding Tax/Qualifying Lender Concepts Payment of interest by a Korean borrower to a foreign lender would be subject to withholding tax under the Korean tax code. The withholding tax rate will be the lesser of 22% (which includes local income tax) or whatever rate is applica- ble under the tax treaty between Korea and the country of tax residence of the foreign lender. In the Korean acquisition finance market, the quali- fying lender concept will often apply, to avoid The deductibility of interest payments in rela- tion to a loan extended by a foreign controlling shareholder (FCS) of the Korean borrower may be restricted under the International Tax Co- ordination Law of Korea. If the amount of the Korean borrower’s debt owed to an FCS or to a third party under a guarantee issued by an FCS exceeds 200% (600% if the Korean borrower engages in finance business) of the “net FCS equity” in the Korean borrower, interest expens- es on the excessive debt are not deductible to the Korean borrower for corporate income tax purposes. In addition, the non-deductible inter- est amount is treated as dividends if the debt is owed to an FCS. any grossing-up of withholding tax. 8.3 Thin-Capitalisation Rules An FCS is a foreign shareholder who either: • directly or indirectly owns 50% or more of the voting power in the borrower; or • substantially controls the business policies of the borrower. Factors indicating control include (among oth- ers): • interlocking directors; • significant financial support;
• business dependency; and • licensing of intangible property.
The “net FCS equity” in the borrower for this purpose is defined as its proportionate share of the larger of: • the net equity (total assets minus total liabili- ties) amount of the company; and • the shareholder’s investment amount (paid-in capital, plus share premium, plus gain from capital reduction, minus discount from capital increase, minus loss from capital reduction) as of the end of the fiscal year. However, if there is any capital increase or capi- tal reduction during the fiscal year, the new FCS equity should be calculated under the average basis. Accordingly, a thin-capitalisation problem cannot be avoided by: • extinguishing loans just before the end of the fiscal year; or • an injection of additional capital immediately before the end of the fiscal year.
9. Takeover Finance 9.1 Regulated Targets
The key regulated industries in Korea include institutions for which applicable laws impose restrictions on the eligibility of major sharehold- ers and/or changes to the composition of the shareholders. These institutions include: • commercial banks;
• insurance companies; • securities companies;
• public broadcast companies; and • telecommunications companies.
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